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Britain faces a "major productivity challenge" if it is to catch up with other European countries, a report claims today.

The Centre for Economic Performance at the London School of Economics (LSE) has identified a positive upturn in productivity since 1991 after decades of disappointing post-war performances.

It acknowledges that this has continued beyond expectations following the recent slowing of the cycle, but notes that the UK remains behind other European competitors like France and Germany on GDP per hour.

"Most of the recent GDP growth seems to have been driven by the growth of employment and capital rather than by true efficiency improvements," the report notes.

It says "structural deficits" exist in research and development, where spending as a proportion of national income has declined steadily since the 1980s.

Meanwhile Britain's workforce, as last year's government-commissioned Leitch report identified, has only a "mediocre" skillset.

The report says ultimately improvements in education will solve this problem but it also suggests poor management skills and "regulatory constraints in the retail sector" will continue to hinder improvements.

"Tackling these problems together is likely to remain a challenge," it concludes.

The Department for Education and Skills was not available for comment prior to the report's publication.